No, I think this is likely overstated. China wants to tackle social inequality and promote social mobility with five tools –redistribution, social welfare, taxes, charity and inclusive education– and one clear target: to increase the middle-income group's share of the economy.
Note that regulatory intervention in China is not new and recent actions are not a significant departure from its historical trajectory. China has made substantial progress towards reforming its markets and aligning them with international standards over the past decade. Economic progress has been at the forefront of policymaking for much longer and there’s nothing to suggest that has changed. And indeed, the Politburo recently emphasised that China is still a market driven economy, promised more transparent communication and pledged support for small and medium enterprises.
Industries such as mobile payment providers, consumer finance and e-commerce names have been targeted by regulatory changes relating mostly to antitrust and data security issues. There is a particular sensitivity to overseas listings by data-heavy companies, as we have seen with the recent listings of Didi. This seems likely to drive many more companies back to listing on the mainland and Hong Kong. The thrust of the regulatory changes in the internet space has been around anti-trust and data security, policies which have been in the works for some time and in many ways have lagged other countries in terms of basic "infrastructure".
From a timing and historical perspective, it is not the first time we have witnessed heightened regulation in China. We only need to cast our minds back to 2018 when government halted new gaming licenses, which in turn saw a near 50% correction in Tencent’s stock price. Markets dislike uncertainty but we have since seen Tencent's shares rally (up 90% from these lows at the end of July 2021) post the clarification of these "rules".
Besides the data security I just mentioned, policy focus is likely to be around areas to do with fairness (i.e. antitrust policies which could see some e-commerce players who have scale advantage to face scrutiny). The policy direction has been hinted towards these regulatory changes for some time now so many of the leading companies are complying.
Whilst we can’t predict the details of every policy move (such as the recent one around education), it is important to keep in mind the historical context and the longer-term goals that have been laid out. China has clear priorities around economic growth, including doubling its GDP per capita (once again) by 2035 - a vibrant and healthy private sector is essential to achieving this aim. Priorities around innovation are also clearly rising - many of the companies in the sectors we are talking about are not only big employers and drivers of growth, but also drivers of innovation. Also, China has made no secret about its goals around developing its capital markets and internationalising the RMB. Clearly, the creation and evolution of a stable investment environment -for both domestic and foreign investors- has to play a part.
The latest regulatory changes reiterate our view that policy direction and implementation does need to be monitored when investing in China.
No, it’s highly unlikely because innovation is a key focus for the Chinese government. It has been a key priority for many sectors and this development is unlikely to be halted.
As I mentioned, government regulation is a constant in China - any investor must accept and incorporate this into his/her risk/reward framework. Many policy initiatives are still evolving and certainly can cause uncertainties which is why it is key for us, at Fidelity, to incorporate this factor into our assessment of the long term business prospects, along with how corporate management teams and their business models are positioned to navigate these changing policies.
Tencent, however, is THE social network in China. It has carefully nurtured and enriched user experience which has led them to grow users and time spent. As China’s internet user growth slows down, Tencent’s enviable user base creates an extremely deep moat for their company. Further, monetization continues to be a key theme for China’s internet industry given the slowdown in user growth. Tencent, in our view, remains very well positioned in terms of monetization potential because of its highly sticky user base and strong ecosystem.
Having said all this, regulatory risks have yet to peak out in the internet space; key areas to closely monitor include data security laws, antitrust investigations, worker’s benefits and content regulations. Additionally, whilst valuations have become very attractive for some names, we need to also consider that sentiment will likely remain weak over the short to medium term.
Not only we are seeing favorable fundamentals to such consumer companies, but support is coming via government policies plus the changes and evolution of the Chinese consumer. These days, it’s no longer just what the consumer buys but why and how they buy their goods and services. Consequently, not only are we seeing a continued trend towards buying goods online, but we are also seeing, with urbanization and higher incomes, the premiumization story play out plus local brands gaining market share.
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